“[The Idea that Loose Money Caused the Bull Market] Is As Simple As It Gets”

Yesterday’s blog entry reported on my recent correspondence with Mike “Mish” Shedlock, author of the Mish’s Global Economic Trend Analysis Blog.

Mike sent me a response to the e-mail set forth in the earlier blog entry on April 12. He put in italic my words “By ‘loose money’ I presume that you mean that the Fed handled monetary policy improperly” and wrote in the response “Yes.” He also put in italic my words “Could it be that the most basic problem is more simple than that?” and responded “No. That is as simple as it gets.”

Set forth below are the words of the April 12 e-mail in which I responded.

Say that the Fed took no action. But the price of stocks went to three times fair value so that every stockholder thought he was  far richer than he really was. Wouldn’t that false belief cause these millions of people to spend money they could not afford to spend?

It seems to me that it is the widespread belief that it is responsible to spend the imaginary money that is the driver here. There’s no need for the Fed to do anything to get people to believe that the funny money is real. People believe those numbers on the bottom of their portfolio statements. It’s the funny portfolo-statement  numbers that are fooling people. People believe that those numbers represent something real.

I don’t say that the Fed didn’t have any effect. But I see the Fed role as secondary. I see the driver as being the Get Rich Quick impulse that makes us all want to see big numbers on our portfolio statements and the promotion of Buy-and-Hold that causes us to believe that those numbers represent something real even when they do not.

I am grateful for your willingness to engage in a bit of back and forth in any event.

Rob